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Central banks should act on stability: RBA

Caroline Smith

The Reserve Bank of Australia governor has again said that central banks should not be limited to setting monetary policy, but take an active role in wider financial stability.

Speaking to a Bank of Thailand policy forum in Bangkok, RBA governor Glenn Stevens said that in previous years, ensuring price stability through inflation targeting (IT) was seen as the main function of central banks - but this was not enough.

"The critique being offered in some quarters is that central banks paid too little attention in the 2000s to the build-up of credit and leverage and to the role that easy monetary policy played in that.

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"The upshot is that the relationship between monetary policy and financial stability is being re-evaluated."

The comments echo remarks the RBA governor made to a conference on property markets and financial instability in August, but not made public until Tuesday.

Mr Stevens said that even if "bubbles" in asset markets were hard to identify, monetary policy could have an effect on risk-taking behaviour in financial markets and asset price falls could cause problems for economies.

"The challenge for central banks, though, is to incorporate into our frameworks all we have learned from the recent experience about financial stability, but without throwing away all that is good about those frameworks," he said.

"We learned a lot about the importance of price stability, and how to achieve it, through the 1970s, 80s and 90s.

"We learned too about the importance of institutional design - we shouldn't discard those lessons in our desire to do more to assure financial stability."

Mr Stevens said central banks could also take a more direct role in government funding, as opposed to widespread secondary market purchases of government bonds by major central banks being seen at the moment.

"It could be argued that fiscal and monetary policies might actually be jointly more effective in raising both short and long-term growth in (major) countries if central bank funding could be made to lead directly to actual public final spending," he said.

Mr Stevens added that those funds could be directed towards infrastructure with a positive and long-lasting social return as opposed to relying on indirect effects on private spending.